By Shevithra Selva Mohan 

Introduction 

In the realm of business agreement, the fine line between a Franchise Agreement and Licence Agreement often demands a discerning eye. The case of Janet Ooi Hui Ming v STC Management Sdn Bhd & Anor [2020] stands as a compelling example, showcasing the complexity inherent in discerning whether an agreement falls under the purview of a licence or a franchise. Franchise agreement in Malaysia are governed under the Franchise Act 1998. 

This article sets out on a journey to delve into the fundamental conditions that determine the nature of an agreement. The focus lies in comprehending whether an agreement leans toward being a Franchise Agreement or Licence Agreement. This distinction holds immense significance as it governs the rights, responsibilities, and legal liabilities for all parties involved. 

In this case, the ‘Franchisee’ and the ‘Franchisor’ entered into an agreement for the establishment and management of a school under the “Shane” brand. The Franchisee raises a legal challenge, asserting the agreement’s invalidity and unlawfulness due to the non-registration of franchise, citing a violation of Section 6(1) of the Franchise Act 1998. This section necessitates Franchisors to register their franchises with the Registry of Franchise (ROF).  

Contrarily, the Franchisor argued that the agreement did not constitute a franchise but rather a mere Licencing Agreement, allowing the Franchisee to utilize the “Shane” brand.”  

However, before reaching a decision on whether the franchise was unregistered, the court diligently emphasized and deliberated on whether the agreement entered into by the involved parties could indeed be classified as a Franchise Agreement from the outset. 

The End Result in Court? 

The court, in allowing the Franchisee’s claim, held that the agreement satisfied all four (4) elements of Section 4 of the Franchise Act 1998: 

1. the Franchisor grants to the Franchisee the right to operate the franchise according to the Shane ‘Cooperation chain system’; 

2. the Franchisor grants to the Franchisee the right to use the Shane mark, syllabus, teaching materials and intellectual property rights; 

3. the Franchisor administer continuous control during the term of the agreement on various factors. This included into the Franchisee’s obligation to strictly adhere to the Franchisor’s business policies and operation manuals. Additionally, the Franchisor maintained significant rights and oversight over the Franchisee’s business operations. These rights encompassed decisions on the centre’s location, conducting inspections and monitoring exercises on the Franchisee’s accounts and operations, ensuring compliance, imposing sanctions for breaches, overseeing brand-related designs and specifications, influencing hiring, and staffing decisions, and dictating the execution of business operations, including arrangements for student payments; and 

4. the Franchisee was to pay Initial Fees and monthly fees to the Franchisor. 

With all the elements stipulated in Section 4 of the Franchise Act 1998 duly satisfied, it is evident that the agreement entered by both parties unmistakably qualifies as a Franchise Agreement, refuting the contention by the Franchisor that it merely constitutes a Licence Agreement. Consequently, the failure to register the franchise before initiating business operations resulted in the agreement being deemed void and unenforceable under Section 2(g) of the Contracts Act 1950. Subsequently, the court ruled in favour of the Franchisee, granting entitlement to a refund of all payments made to the Franchisor. 

In Summary  

It is essential for all potential Franchisors to grasp that a Licence Agreement falls under the jurisdiction of the Contracts Act 1950, whereas a Franchise Agreement is governed by the Franchise Act 1998. Therefore, a precise drafting is imperative when formulating an agreement to prevent a Licence Agreement from inadvertently falling within the purview of the Franchise Act.  

It’s noteworthy that when a contractual party drafts a Licence Agreement with heightened protection, there’s a heightened risk that its content or terms might deviate towards resembling a Franchise Agreement. Unlike a Licence Agreement, which primarily safeguards a business’s trademark without exerting continuous control over the operations, a Franchise Agreement involves a deeper level of control and supervision. Thus, precision in drafting agreements is crucial for Franchisors to prevent inadvertent breaches of the law, which could result in legal and financial consequences. 

Main Insights  

An agreement may possess crucial aspects of a franchise while appearing to be a simple Licencing Agreement. However, misrepresenting a franchise as a mere Licencing Agreement can result in its classification as an unregistered franchise, potentially leading to severe legal penalties.  

For anyone encountering similar issues in this case, KASS is well-prepared to provide guidance and assistance with franchise inquiries across Malaysia, Indonesia, and other Southeast Asian nations. Our team stands ready to offer expertise and unwavering support in navigating the complexities of franchising.